Global Business Financial Overview of Term Paper

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Until August, there are 2 scenarios: (1) - the YEN depreciates and the company will pay more YENs to the suppliers or (2) - the YEN appreciates and the company will pay less YENs to the suppliers, but the same amount of euros. To avoid the first scenario, McDonald's has to use currency risk tools: futures and forwards. These are agreements signed today to buy/sell a given amount of money at a given date in the future for a well defined exchange rate. Therefore, the company will sign a contract with a broker from a financial institution that will contain an agreement to buy 5,000,000EUR on the 5th of August at a 161.69YEN=1EUR parity. The former will have to cover the so called margin account, which pays respect to an amount deposited in the broker's account meant to cover potential losses with the futures or forward contract.

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There are 2 types of margins: initial and maintenance. The initial one is equal to the initial margin of the account the second one is equal the lower limit possible for the account. If the losses will not be higher than the difference between the 2 margins, no margin call is issued and if losses are higher than this difference, then the entire difference will be added to the account. Usually on the market, speculators and hedgers are those to buy and sell futures and forwards. According to www.investorwords.com, a hedger can be "any corporation that takes a position in a commodity market for business reasons."

So, to summarize, McDonald's from Japan can avoid foreign exchange risk by resorting to futures and forward contract.

MCDONALD JAPAN - FOREIGN….....

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